Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, May 31, 2007

SEC and Brocade Communications Settlement of Backdating Charges Expected; $7 Million Penalty

The SEC will announce shortly that Brocade Communications has agreed to pay a $7 million civil penalty to settle stock options backdating charges, according to the Wall St. Journal.  People have been waiting for this settlement for months, to get an indication of the SEC's thinking on corporate penalties in the stock options backdating context.  According to the WSJ, Brocade agreed to the $7 million penalty over a year ago, but SEC approval was delayed as SEC attorneys opened numerous investigations into backdating charges and the Commissioners debated the appropriate policy on corporate penalties.  After the huge penalties paid by corporations in some of the financial fraud cases, some argued (including Commissioner Paul Atkins) that penalties on corporations imposed a hardship on current shareholders; penalties are more appropriately imposed on the executives who engaged in the wrongdoing.  The backdating cases present thorny questions of whether the anyone was harmed by the backdating (since in many cases the stock prices quickly recovered after disclosure) and, conversely, was there a corporate gain -- both factors taken into account in determining the level of penalties.  A few months ago, Chair Cox confirmed the SEC's new policy of requiring staff attorneys to seek Commission approval before beginning settlement talks that could result in a corporate penalty, in order to achieve some consistency in this area.  Some viewed this as a signal that corporate penalties would become less common and smaller in amount, although Cox denied this would necessarily be the outcome.  See WSJ, Backdating Fine May Set Model.

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